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Multiple Choice
1-1 Economic theory is a valuable tool for business decision making because it
a. identifies for managers the essential information for making a decision.
b. assumes away the problem.
c. creates a realistic, complex model of the business firm.
d. provides an easy solution to complex business problems.
Answer: a
Difficulty: 01 Easy
Topic: The Economic Way of Thinking About Business Practices and Strategy
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 01-01
Answer: a
Difficulty: 01 Easy
Chapter 1: MANAGERS, PROFITS, AND MARKETS
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Topic: Measuring and Maximizing Economic Profit
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 01-02
1-5 Consider a firm that employs some resources that are owned by the firm. When accounting profit
is zero, economic profit
a. must also equal zero.
b. is sure to be positive.
c. must be negative and shareholder wealth is reduced.
d. cannot be computed accurately, but the firm is breaking even nonetheless.
Answer: c
Difficulty: 02 Medium
Topic: Measuring and Maximizing Economic Profit
AACSB: Analytic
Blooms: Apply
Learning Objective: 01-02
1-8 Suppose Marv, the owner-manager of Marv’s Hot Dogs, earned $82,000 in revenue last year.
Marv’s explicit costs of operation totaled $36,000. Marv has a Bachelor of Science degree in
mechanical engineering and could be earning $40,000 annually as mechanical engineer.
a. Marv's implicit cost of using owner-supplied resources is $36,000.
b. Marv's economic profit is $36,000.
c. Marv’s implicit cost of using owner-supplied resources is $30,000.
Chapter 1: MANAGERS, PROFITS, AND MARKETS
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
d. Marv's economic profit is $6,000.
Answer: d
Difficulty: 01 Easy
Topic: Measuring and Maximizing Economic Profit
AACSB: Analytic
Blooms: Apply
Learning Objective: 01-02
1-10 Owners of a firm want the managers to make business decisions which will
a. maximize the value of the firm.
b. maximize expected profit in each period of operation.
c. maximize the market share of the firm.
d. both a and b are correct when revenue and cost conditions in one time period are
independent of revenues and costs in future time periods.
Answer: d
Difficulty: 02 Medium
Topic: Measuring and Maximizing Economic Profit
AACSB: Analytic
Blooms: Apply
Learning Objective: 01-02
Answer: c
Difficulty: 02 Medium
Topic: Market Structure and Managerial Decision Making
AACSB: Analytic
Blooms: Apply
Learning Objective: 01-04
1-17 A market
a. raises the transaction costs of doing business.
b. is any arrangement that brings buyers and sellers together to exchange goods or services.
c. is an institution used rarely by capitalist nations.
d. is characterized by rigid prices
Answer: b
Difficulty: 01 Easy
Topic: Market Structure and Managerial Decision Making
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 01-04
1-18 Which of the following is NOT one of features characterizing market structures?
a. the number and size of firms
b. the likelihood of new firm’s entering a market
c. the level of capital investment in research and development
d. the degree of product differentiation
Answer: c
Difficulty: 01 Easy
Topic: Market Structure and Managerial Decision Making
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 01-04
Answer: c
Difficulty: 01 Easy
Topic: Market Structure and Managerial Decision Making
Reflective Thinking
Blooms: Remember
Learning Objective: 01-04
Answer: d
Difficulty: 01 Easy
Topic: Market Structure and Managerial Decision Making
Reflective Thinking
Blooms: Remember
Learning Objective: 01-04
Answer: a
Difficulty: 01 Easy
Topic: Measuring and Maximizing Economic Profit
Reflective Thinking
Chapter 1: MANAGERS, PROFITS, AND MARKETS
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Blooms: Understand
Learning Objective: 01-02
1-25 A manager who does not see his or her goal as the maximization of profit
a. may nevertheless maximize the value of the firm.
b. represents a principle-agent problem.
c. will likely be replaced either by shareholders or by a takeover of the firm.
d. both b and c
Answer: d
Difficulty: 01 Easy
Topic: Measuring and Maximizing Economic Profit
Reflective Thinking
Blooms: Understand
Learning Objective: 01-02
1-26 Which of the following developments encouraged globalization of markets during the 1990s?
a. Eleven European countries began using the “euro” as a common currency.
b. The ability to buy and sell goods on the Internet was increased.
c. Numerous bilateral and multilateral trade agreements were reached.
d. both a and c
e. all of the above
Answer: e
Difficulty: 01 Easy
Topic: Globalization
Reflective Thinking
Blooms: Understand
Learning Objective: 01-05
1-28 St. Charles Hospital, located in an upper-income neighborhood of a large city, recently received a
restored mansion as a gift from an appreciative patient. The board of directors decided to remodel
the mansion and use it as recuperative quarters for patients willing to pay for luxurious
accommodations. The cost to the hospital of using the mansion includes
a. nothing because it was a gift.
b. how much the hospital pays for upkeep--taxes, insurance, utilities, maintenance, etc.
c. how much the hospital would receive if it rented or sold the mansion.
d. both b and c
Answer: d
Difficulty: 01 Easy
Topic: Measuring and Maximizing Economic Profit
Reflective Thinking
Blooms: Understand
Learning Objective: 01-02
1-29 Until recently you worked as an accountant earning $30,000 annually. Then you inherited a piece
of commercial real estate bringing in $12,000 rent annually. You decided to leave your job and
operate a video rental store in the office space you inherited.
At the end of the first year, your books showed total revenues of $60,000 and total costs of
$30,000 for video purchases, utilities, taxes, and supplies. What is the total cost of operating the
video store?
a. $72,000
b. $42,000
c. $30,000
d. $12,000
Answer: a
Difficulty: 02 Medium
Topic: Measuring and Maximizing Economic Profit
Reflective Thinking
Blooms: Understand
Learning Objective: 01-02
1-30 At the beginning of 2015, market analysts expect Atlantis Company, holder of a valuable patent, to earn
the following stream of economic profits over the next five years. At the end of five years, Atlantis will
lose its patent protection, and analysts expect economic profit to be zero after five years.
Expected Economic
Year Profit
20154 $ 225,000
2016 $ 325,000
2017 $ 425,000
2018 $ 200,000
2019 $ 100,000
Revenues
Revenue from sales of goods and services ........................... $80,000,000
Operating costs and expenses:
Cost of products and services sold ....................................... $30,000,000
Selling expenses ................................................................... $3,000,000
Administrative expense ........................................................ $4,000,000
Total operating costs and expenses ................................ $37,000,000
Income from operations .............................................................. $43,000,000
Interest expense (corporate bonds & loans) ................................ $300,000
Non-recurring expense (Legal expenses/fines in
settling a federal antitrust suit) ............................................. $200,000
Income taxes ............................................................................... $700,000
Net income .................................................................................. $41,800,000
During this year of operation, Quest Realty owned and occupied an office building in downtown
Indianapolis. For this year, the building could have been leased to other businesses for $2,000,000
in lease income. Quest Realty also owned undeveloped land valued at $15,000,000. Owners of
Quest Realty can earn a 14% rate of return annually on funds invested elsewhere.
1-31 Total explicit costs of using market-supplied resources for Quest Realty for this year are
a. $23,000,000
b. $37,000,000
c. $38,200,000
d. $41,100,000
e. none of the above
Answer: c
Difficulty: 03 Hard
Topic: Measuring and Maximizing Economic Profit
AACSB: Analytic
Blooms: Analyze
Learning Objective: 01-02
Chapter 1: MANAGERS, PROFITS, AND MARKETS
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1-32 Total implicit costs of using owner-supplied resources for Quest Realty for this year are
a. $4,100,000
b. $19,000,000
c. $38,200,000
d. $41,000,000
e. none of the above
Answer: a
Difficulty: 02 Medium
Topic: Measuring and Maximizing Economic Profit
AACSB: Analytic
Blooms: Apply
Learning Objective: 01-02
1-37 Microeconomics
a. is generally too complex and abstract to be of much use in making real-world business decisions.
b. studies the behavior of individual economic units or segments of the economy.
c. contributes to the understanding of ordinary business practices or tactics.
d. all of the above.
e. both b and c.
Answer: e
Difficulty: 01 Easy
Topic: The Economic Way of Thinking About Business Practices and Strategy
Reflective Thinking
Blooms: Remember
Learning Objective: 01-01
1-40 Which of the following economic forces promotes profitability in the long run?
a. Existence of strong barriers to entry.
b. A large number of complementary products
c. A large number of close substitute products.
d. Both a and b
e. All of the above
Answer: d
Difficulty: 02 Medium
Topic: Measuring and Maximizing Economic Profit
AACSB: Analytic
Blooms: Apply
Learning Objective: 01-02